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Italy At Risk Of Seeing 'Repeat Of Greek History' -- Former ECB Director

Kitco News

(Kitco News) - Although market fears of an Italian contagion effect are now largely subdued, one strategist said that the country is not out of the woods, yet. 

With Premier Giuseppe Conte heading a newly sworn-in Cabinet to head a coalition government, financial markets found relief in political stability, but not everyone is confident in the populist leaders’ policies. 

Francesco Papadia, fellow of the Bruegel Institute and former market operations director of the European Central Bank, told Kitco News that he remains sceptical whether the new government’s goals can be fiscally sustainable.

“For the time being, things have calmed down, but I would not say that we are out of the woods as yet, because we want to see whether this new government will comply with its electoral promises, which of course, cannot be implemented without big problems on the fiscal side,” he said.

At the helm of this governing coalition is a right-wing party with a staunch anti-immigration bent and an apparent Eurosceptic agenda, with Paolo Savano, Italy’s new Europe minister having described the euro as a “German Cage.”

The new coalition government is set to face mandatory confidence votes this week where the Italian Senate will vote on the new cabinet, followed by a similar vote from the Parliament’s other chamber.

Last Tuesday saw the biggest single-day surge on record for Italian 10-year bond yields on the back of news that President Sergio Mattarella rejected the candidate for finance minister, a move seen by many as a stand against populism.

North American markets tumbled in response, with the S&P 500 down more than 1.2% on the day while safe-haven assets rallied; spot gold climbed $6 an ounce by market close. Markets have since recovered as volatility subsided as a new government promised renewed stability in Italy’s political system.

Papadia said that should Italy’s debt burden spiral out of hand, the ECB will not be in a position to come to assistance.

“Let me be very clear on this, the ECB cannot do anything for Italy in particular, so I don’t think that the ECB could come in and solve Italian problems,” Papadia said. “Italian problems are not economic problems currently.”

As of 2017, Italy’s ratio of government debt to gross domestic product stood at 131.8%, compared to Greece’s 172% during the height of the European debt crisis in 2010.

Papadia added that indicators show a relatively healthy macroeconomic landscape.

“It’s not great, but it’s doing OK. Growth is back, unemployment is coming down, non-performing loans are coming down, [there is] a nice primary surplus on the fiscal side,” he said. “The problems are created by the intended policy of the new government, and the ECB cannot do anything about that.”

Papadia said that Italy’s political tensions may be exacerbated by policy that contradicts economic viability.

“When the government realizes that it cannot do what it wants to do, there would be some tension in the bond markets, but not much more than that. If they were to continue, then you could see a repeat of the Greek history,” he said.

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